CVS-Aetna deal said to dodge some antitrust hurdles

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CVS Health appears to have allayed some antitrust concerns in its bid to buy insurer Aetna, but some fear the merger still could be anticompetitive.

Antitrust enforcers don’t see competitive problems that can stem from uniting companies that operate at different levels of a supply chain, according to two people familiar with the matter.

That question has hung over the deal since it was announced last year because the Justice Department under President Donald Trump has raised the bar for approving such transactions, which are known as vertical deals because they don’t combine direct competitors.

The investigation by the Justice Department’s antitrust division hasn’t turned up vertical-competition concerns from the merger, according to the sources, who declined to be identified because the review is confidential. Instead, the government is focused on competition between the companies in the prescription drug market, they said.

CVS’s $68 billion deal to buy Aetna was announced on the heels of the Justice Department’s unsuccessful lawsuit to block AT&T takeover of Time Warner, a vertical deal that combined a pay-TV distributor with a programmer. That case was a warning shot that enforcers were suddenly taking a tougher stand on such tie-ups.

The Aetna acquisition would combine the drugstore giant with the third largest health insurer. CVS also manages drug benefits plans for employers and insurers, a business that could help steer some of Aetna’s 22 million customers into CVS drugstores when they fill a prescription.

It’s one of two healthcare transactions that are poised to reshape the industry. The other is insurer Cigna’s planned purchase of Express Scripts Holding, a pharmacy benefit manager. That deal is facing opposition from activist investor Carl Icahn, who has acquired a stake in Cigna.

The Justice Department and Aetna declined to comment. CVS declined to comment other than to say it was continuing to work productively with the antitrust division’s staff. The government’s focus on prescription drugs was earlier reported by the Capitol Forum.

With vertical issues no longer a focus of the probe, CVS may have an easier path to approval. Completing the deal could require asset divestitures in areas where the companies directly compete.

One of the most obvious areas of overlap is in Medicare Part D, the government-sponsored prescription drug plan for the elderly. CVS is the largest provider of Part D plans, with more than 6 million patients enrolled as of June, according to data compiled by Bloomberg Intelligence.

Aetna is a smaller Part D player, with slightly less than 2.2 million patients in the drug plans, according to Bloomberg Intelligence. It also runs a separate type of Medicare plan called Medicare Advantage that typically includes drug coverage as part of a full package of inpatient and outpatient benefits.

By acquiring Aetna, CVS would have national market share in Part D plans of about 33 percent, according to the California Department of Insurance, which reviewed the merger and urged the Justice Department on August 1 to sue to block the deal. If the deal goes ahead without changes, three companies would control 83 percent of the Part D market in California, the regulator said.

Additionally, on Wednesday, the American Medical Association urged the Department of Justice to block the proposed acquisition of Aetna by CVS, with the national professional group sharing an AMA analysis indicating the proposed merger would likely substantially diminish competition in many healthcare markets to the detriment of patients.

“The CVS-Aetna deal is popularly described as a vertical merger involving two companies that don’t operate in the same markets,” said AMA President Barbara L McAneny, MD. "But in fact, CVS and Aetna do operate as rivals in some of the same markets, raising substantial concerns that are specific to horizontal mergers. A merger of these two rivals would risk a substantial reduction of competition in the stand-alone Medicare Part D prescription drug plan market and the pharmacy benefit management (PBM) services market.”

Bloomberg News